REFILE-China stocks close slightly higher, climb off 2-1/2 month lows

SHANGHAI, May 26 (Reuters) - China stocks closed marginally higher on Thursday as late buying of large cap stocks helped equities bounce off the 2-1/2 month lows hit in the morning session.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen rose 0.2 percent, to 3,064.21, while the Shanghai Composite Index gained 0.3 percent, to 2,822.44 points.

Earlier in the session, the CSI300 fell to 3,027.44 points, a level not seen since mid-March.

Despite the late swing into positive territory, investors remained broadly cautious about conditions in the world’s second largest economy.

Data earlier this week showed China’s state-owned firms’ profits fell 8.4 percent year-on-year in the first four months of this year from a year earlier, while their debts surged 18 percent, highlighting the challenges Beijing faces as it tries to restructure the bloated state sector as the economy slows.

Industrial profit data is due out on Friday.

Moody’s ratings agency said that China’s authorities have the tools to avert a financial crisis, but erosion of credit quality is likely over the medium term.

“China’s growing debt overhang will impose a substantial deadweight cost on the economy that will need to be allocated between the state, banking system, and corporate and household sectors,” the credit rating agency said in a report on Thursday.

“The price will likely be the persistence of large unrecognised banking sector losses, misallocation of capital, delays to the reduction in excess capacity and economic rebalancing, and a prolonged period of sub-optimal growth.”